BoE updates its Climate Change Adaptation Report

In 2021, the Bank of England published its Climate Change Adaptation Report (CCAR), which set out early thinking on climate change and the regulatory capital frameworks for banks and insurers. It has now updated this with a new report and key findings from consultation.

Existing capability and regime gaps have created uncertainty over whether banks and insurers are sufficiently capitalised for future climate-related losses. The unique characteristics of climate risks mean that their capture by capital frameworks requires a more forward-looking approach than used for many other risks.

The Bank believes that although scenario analysis and stress testing will play a key role in this, regulators, including the Bank, need to focus on the development of these frameworks and how they can inform capital requirements. However, BoE also believes that the current evidence suggests that the existing time horizons over which risks are capitalised by banks and insurers are appropriate for climate risks.

The problem, the Bank, is the current evidence is based on current experience and a paucity of research, despite the Bank having requested research on the conceptual challenges of incorporating climate risks into the capital frameworks. The organisation remains open to further discussion and consultation.

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